Congratulations President Obama: Now here is your muniland checklist

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President Obama deserves a few mornings to sleep in, and then it is time to get back to work. Upcoming federal tax and deficit reform have been grabbing headlines, but there are other D.C. policy reforms that could have a major effect on states and cities. These need to be on the president and Congress’ 2013 checklist.

Block-grant Medicaid to the states:

Medicaid is slated to increase by approximately 17 million Americans under the Affordable Care Act for adults whose income falls below 133% of the poverty line. But who pays for this expansion? The federal government:

The Medicaid expansion is a great deal for the states. The federal government will pay 100 percent of the costs of covering people who will be “newly eligible” for Medicaid for years 2014 through 2016. These are persons who would not be eligible under their states’ current programs. After 2016, states will start paying some of these costs, but the federal government will always cover at least 90 percent.

Will the federal government really have the funds to pay for 100% expansion of Medicaid and continue the payments that were already in place to states, including nursing home payments? I suspect that the new funding will not be there. Other budget priorities will knock this one to the bottom of the list.

The president and Congress have a chance of seeing positive acceptance for ACA Medicaid expansion if they agree to Republican governors’ request for block-granting Medicaid payments. This would give Medicaid funds to states in lump sums and allow each to administer their program in the way bested suited to local social and economic needs. It would make expanding and administering the program much easier at the state level.

28 of the 42 streams of federal funding to the states would face cuts. The programs facing cuts are found across a range of departments and services, from special education and low-income heating assistance to veterans’ employment and training.

Whatley said states, for the most part, will be able to pass those cuts along to direct beneficiaries—either the people receiving the benefits or local governments that might administer programs. The exception, he said, is in some education funding.

States should be given their reduced funding as block grants as well, and then be allowed to shift the dollars between programs according to their local needs. For example if Maine faced a particularly cold winter, its leaders could shift more funds to home heating assistance. As federal funding to states shrinks and as governors and legislatures face shifting priorities, they need more flexibility to spend. President Obama should loosen Washington’s reins on the states.

Weaken or end the war on drugs:

The criminalization of drug use harks back to this nation’s flirtation with alcohol prohibition. State and local governments are now passing laws to unwind draconian penalties on drugs. As I wrote yesterday, criminalizing drug use is an enormous drain on stretched police budgets and it spends precious dollars on incarceration. The whole process must be rethought:

Public policy approaches to the “war on drugs” have been debated over the years, but really not often enough using dollar figures. By ending the prohibition on some or all illegal drugs and taxing and regulating their distribution instead, U.S. governments at all levels could save over $50 billion per year, according to various studies.

In Grand Rapids, voters made marijuana possession a civil infraction punishable by a fine — rather than a misdemeanor that carried possible jail time — 59-41 percent. In Flint, allowing possession of less than an ounce for those older than 19 was leading 57-43 percent with 95 percent of precincts reporting.

Nationally, voters in Colorado and Washington also approved recreational use of the drug, setting up a potential showdown with federal authorities.

There will likely be an increasing number of battles between state and local governments and the federal government over the decriminalizing drug use, and this may cause more public frustration over the reach of the federal government. By unwinding or addressing the “war on drugs,” President Obama could help to restore may people’s faith in government.

Infrastructure spending:

Hurricane Sandy laid bare the fragility of many systems that power our information economy. America needs at least one program, on the scale of the Panama Canal, to strengthen critical infrastructure. There are many ways to fund these efforts, including the federal government issuing infrastructure bonds that could be bought by the Federal Reserve, or creating a national infrastructure bank. The one thing that must not be done is to sell valuable public assets to private entities at fire-sale prices. This would drastically reduce the public assets of future generations who are unlikely to receive the level of public entitlements that current beneficiaries are receiving. We would be selling the family silver to pay off current debts.

I understand that President Obama faces enormous responsibilities to balance the federal budget and boost the economy. State and local governments can play an enormous role in this effort, but they too must be released from too much regulation and red tape. Time to loosen the leash.

Dear Ms. Long:
Over the past several months you have been overly critical of Puerto Rico and specifically of the current and now outgoing administration.
I don’t know if you are aware but Governor Fortuno was defeated by Alejandro Garcia Padilla.

Now, given your interest in our great Island, I wonder if your comments and writeups were politically driven, or if you have anything to add now that there is a new Governor, who has even explained how he will deal with the fiscal situation and the pension situation and is threatening to cancel existing and binding contracts, just because he doesnt like them. It would be quite interesting to read your opinion now.

Good article! I don’t know enough about the details of Federal and State funding issues to have a useful opinion, but what you write sounds very sensible to me — as long as the states don’t somehow abuse their block-grant-enabled autonomy.

Author Profile

I’m Cate Long and I write about the retail fixed income markets including municipal bonds. My primary interest is creating tools and systems to help retail investors understand bond markets. I’ve worked for a number of years with industry standards organizations, regulators and Congress to help craft a more transparent and fair framework for investors to participate in the fixed income markets. I'm a guest contributor to Reuters.com. Any opinions expressed are mine alone.